China Property Bounces Back, but Analysts Are Worried

China’s property sector, which has suffered from seven consecutive months of price declines after a slew of government tightening measures, is staging a surprising turnaround, boosted by the central bank’s recent monetary policy easing.

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But analysts fear the rebound could lead to a new crackdown by the government, which is keen to keep prices in check.

The average price for a residential property rose 8.4 percent in May from a year earlier to 5,740 yuan ($900) per square meter. Property sales in key cities including Hangzhou, Shenzhen and Nanjing have sped up in recent months, Shanghai Securities News reported on Wednesday.

A day earlier, the country’s second-largest property developer China Evergrande reported a 33 percent rise in May sales to a record 10.37 billion yuan ($1.62 billion) - the highest single-month sales record in the company’s history.

China’s recent interest rate cut, which lowers mortgage rates for homebuyers, has also added to optimism around property sales. On Tuesday, the Chairman of Shui On Land told Reuters that he expects the latest policy move would boost transaction volumes this year.

Du Jin Song, real estate analyst at Credit Suisse, who had expected real estate prices to decline 10 percent this year, now forecasts property prices will in fact rise in the second and third quarters.

“With China’s lending and deposit rate cut, we expect investment and speculative demand for housing to further increase,” Du said. “I have just come back from China, and in many of the (housing) projects, prices are already going up.”

But Du warns there is “danger” that prices could “surge” and place the sector at risk of aggressive policy tightening.

“In a few months, once (Chinese) economic data becomes better and the central government has more room to adjust the economy, (the government) may face a difficult choice on whether to come down hard on rising housing prices again, so the policy risk is still there,” Du said.

A sharp slowdown in the property sector has been regarded as a major risk for the economy, as real estate investment accounts for 13 percent of the country’s overall gross domestic product.

Wendy Luo of Barclays, agrees that large price rises would put the government in a “tough spot”, and could trigger tightening moves.

“In order to keep policy credible and avoid an asset bubble, (the government) may control credit supply to developers,” Luo said.

In the meantime, investors who have bet on real estate stocks seem to be profiting this year. China’s property stocks are among the best performing in Hong Kong – up around 30 percent year-to-date. But Credit Suisse’s Du expects the rally to be limited.

He is underweight the sector and expects new property tightening measures later this year. “Never underestimate the government’s imagination,” he said. “They can do anything.”